India Inc is set to benefit from lower cost of raising funds after the surprise rate cut by the central bank yesterday. According to estimates, the cost of borrowing through private placement of bonds have already dropped by close to 30 basis points yesterday and with expectations of further rate cuts, fund raising will turn cheaper.
Yesterday, the Reserve Bank of India (RBI) reduced the repo rate or the rate at which banks borrow from RBI by 25 basis points to 7.75 per cent due to comfort on the inflation front and government’s commitment to adhere to the fiscal deficit target.
“Yesterday Steel Authority of India raised Rs 500 crore through 5 year bonds and the coupon rate was 8.30 per cent. Before rate cut the coupon would have been over 8.50 per cent. The coupon rates have dropped by 15-20 basis points and in couple of cases it has dropped by more than 30 basis points. Today IL&FS raised 10-year bonds at 8.72 per cent while couple of weeks ago they had raised 10-year bonds for 9 per cent,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.
According to issue arrangers banks and corporates have lined up their bond issuances and in the near future State Bank of Patiala, PowerGrid Corporation of India , Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) have lined up their bond issuances through the private placement route.
“There is an expectation that there would be further rate cuts by 50-75 basis points in 2015. According we can see corresponding fall in cost of borrowing by way of bonds. If on February 3 a rate cut does not happen but RBI makes dovish statements, a similar fall in coupon rates may not happen, but at least softer bias for rates will continue,” said Arvind Konar, head of fixed income, Almondz Global Securities.
Data from Securities and Exchange Board of India (Sebi) shows that India Inc has raised Rs 2.69 lakh crore between April-December compared with Rs 2.76 crore during April-March the previous fiscal.
RBI will review the monetary policy on February 3 and the broad expectation is that the repo rate may remain unchanged on that day as the central bank may wait for the Union Budget to be announced later in February.
“Key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure. The latter would be needed to ensure that potential output rises above the projected pick-up in growth in coming quarters so as to contain inflation,” said Raghuram Rajan, governor, RBI in a statement after the rate cut yesterday.
Consumer Price Index (CPI) inflation rose an annual 5 per cent in December compared with a rise of 4.38 per cent year-on-year in November 2014, the slowest pace in data going back to January 2012. But despite a rise in CPI inflation, it was below market expectations.
The fiscal deficit for the current fiscal is pegged at 4.1 per cent of Gross Domestic Product (GDP) while for the next fiscal it has been targeted at 3.6 per cent of GDP.